The dwindling fossil fuel resources have been adding a tremendous strain on all the economies of the world. Citizens of India too, are run down by exponentially increasing fuel prices and subject to the consequential skyrocketing costs of commodities and services by virtue of logistics costs. All the while fossil fuels continue to be top contributors to global warming and deterioration of air quality. Clean energy is a much-sought-after alternative to fossil fuel energy. In order to be able to support the production of clean energy, the country requires infrastructure and technical capabilities. The GOI has provisioned many schemes and policies to support the establishment of companies that generate renewable energy. This article discusses the requirements and entitlements of applicants to avail loans against future cash flows from renewable energy and energy efficiency projects.
Loan against Securitization of Future Cash Flow of Renewable Energy Projects
The IREDA under the scheme “Loan against Securitization of Future Cash Flow of Renewable Energy Projects,” provides for the sanction of a loan against securitization of future cash flows of existing renewable energy projects which can be used for future business expansion in renewable energy and energy efficiency sectors. The loan scheme is extended to existing borrowers of the IREDA as well as any new borrowers with established renewable energy projects and energy efficiency projects that after having successfully commissioned the project have been successfully operational for a period of 3 years and no less than 2 years for projects in the sector with a debt to service rating of 1.4 and above.
Any company applying for loans against their future cash flows under this scheme must take note of the following:
• The net present value of the future cash flows will be calculated for a maximum period of 10 years, discounted at the maximum lending rate of the sector.
• The scheme will be extended for the projects considering a maximum life of 20 years from the date of commissioning.
• The minimum-security coverage (including future cash flow) should be 1.5 times of the loan amount.
• As the loan amount has been decided based on the available future cumulative cash flow surpluses, hence, date of disbursement is critical, and hence any extension of the validity period will not be considered
For a renewable energy project to be eligible to secure loans for business expansion based on their future cash flows the following conditions must be met:
• Project is commissioned and is running successfully for at least the last three years. However, the condition may be relaxed to 2 years; provided the project is running successfully for the last 2 years and the average DSCR for the last two years is 1.4.
• The applicant company should be earning cash profit for a minimum of three previous years. However, the condition may be relaxed to 2 years from the existing 3 years subject to fulfillment of the relaxation criteria as indicated above.
• Minimum 40% of the existing loan account should have been repaid including loans of co-financiers if any. However, the condition may be relaxed in cases where the Company is regular in repayment of dues for the last 2 years and the maximum debt-equity ratio (DER) of the Company including the proposed loan should not be more than 3:1 subject to fulfillment of the relaxation criteria as indicated above.
• The loan account should not have been declared as NPA at any time in the past due to any reason.
• Minimum average debt service coverage ratio (DSCR), including the existing debt, should be 1.25 for the loan repayment period. For Hydro Projects, the min. average DSCR Value including existing debt, to be taken as 1.3.
• The loan account should not have been restructured due to a shortfall in generation, at any time in the past.
• Power Purchase Agreement should have entered with SEB / Power Trading Company/ Power utility company for a minimum period equal to or more than the loan repayment period. Or Any other power sale arrangement to the satisfaction of IREDA.
• Maximum debt-equity ratio (DER) of the company including the proposed loan should not be more than 4:1.
3. Fee and validity:
Following are the requirements and details regarding the application fee under this scheme:
• Application Fees as per the prevailing guidelines of IREDA.
• Sanction Letter will be valid for 45 days from the date of issue of sanction letter.
• Front end fee of 1.0 % of the loan to be paid before execution of loan agreement.
• To execute loan agreement within 45 days from the date of issue of the Sanction Letter.
• Disbursement within 60 days from the date of signing the Loan Agreement.
4. Loan Terms:
The loans awarded under this scheme are subject to the following terms:
• Interest Rate will be based on the Rating of the Project plus an additional 1.25% with interest reset as per prevailing IREDA Norms.
• Additional interest rate shall be fixed by the CRRS committee, however, initially it is proposed to fix at 1.25% as an additional interest rate for all grades.
• Pre-payment charge as per the prevailing norms of IREDA.
• Maximum loan repayment period shall be 15 years from the date of disbursement or 80% of the balance life of PPA, whichever is lower, depending on the project cash flows, DSCR of the project, etc.
• No moratorium
• Flexi-repayment schedule of quarterly principal installments may be drawn on the basis of generation and cash flow projections.
• The borrower will give an undertaking that the amount funded by IREDA shall be utilized as seed money for future renewable energy and energy efficiency projects and that IREDA will have the first right to finance these projects.
5. Documents Required:
In order for the IREDA to ensure that the loan sanctioned is utilized for investment in RE / EE projects, the applicant company must provide the following documents/information:
• An undertaking that the fund released by IREDA shall be utilized towards business expansion in the Renewable Energy & Energy Efficiency sectors only.
• A detailed business plan, supported with documents indicating:
– The proposed utilization of funds for the development of Renewable Energy / Energy Efficiency, if any, along with a detailed timeline.
• A Special No Lien account for deposit and utilization of funds released by IREDA shall be opened as per IREDA’s requirement and a quarterly No Lien account statement, along with a Utilization Certificate from Chartered Accountant, shall be submitted to IREDA.
Disbursement will be made within 60 days from the date of signing of the Loan Agreement. The utilization of funds shall be completed within 2 years from the date of disbursement. During the interim period i.e., till the funds are fully utilized towards investment in Renewable Energy / Energy Efficiency projects, the balance / unutilized portion of funds in the No Lien account may be kept as a fixed deposit in the same account. The funds cannot be invested in any other instruments including shares, mutual funds, etc. Further, any interest accrued from the above-fixed deposit may be utilized for repayment of IREDA’s dues, if required. The repayment of installment and interest towards the loan shall be made from the sale proceeds of power of the existing project, through the TRA account.
The curious reader and hopeful entrepreneur may find the IREDA’s Loan against Securitization of Future Cash Flow of Renewable Energy Projects scheme here.